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Economic Simulations Using Mathematica Kota Minegishi

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Outline 1.Objectives 2.Notional Demand Driven Economies 3.Effective Demand Driven Economies 4.Conclusions

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1. Objectives Q. Why economic simulations? A. Economic simulations allow us to Understand existing theories better Change some assumptions in theories Light existing theories from different angles Improve our intuitions on economic theories

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1.Objectives Our Targets Setup and compare models for: Notional Demand Driven Economies The Walrasian Auctioneer Effective Demand Driven Economies Triangular Trade To Show Simulations in Mathematica Iterations Modified assumptions in theories Graphical interpretations

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2. Notional Demand Driven Economies P1, P2, P3 S1S2S3Dn2Dn1Dn3 Auctioneer Excess Demand P Excess Supply P

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2. Notional Demand Driven Economies P1, P2, P3 S1S2S3Dn2Dn1Dn3 Auctioneer No Excess Demand or Supply Then, Traders FINALLY trade.

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2. Notional Demand Driven Economies Final P1, P2, P3 For time = t S1S2S3Dn2Dn1Dn3 Auctioneer

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2. Notional Demand Driven Economies Ideas For Implementation Define traders’ supply functions Define traders’ utility functions and budget constraints derive demand functions Solve di = si for i = 1, 2, 3 simultaneously for {p1, p2, p3} With these price equations, define equations for quantities, money holding, and GDP over time.

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3D2D From [1], [2], & [3], obtain local extrema (x, y) and Lagrange multiplier λ Utility Maximizing Behavior

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Utility Maximizers (Trader 1, 2, & 3) Consider Trader 2;

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Trader 2;

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2. Notional Demand Driven Economies Definitions A1; si[t] = di[t] m1[t] = m1[t - 1] + p1[t] s1[t] - p2[t] d2[t] m2[t] = m2[t - 1] + p2[t] s2[t] - p3[t] d3[t] m3[t] = m3[t - 1] + p3[t] s3[t] - p1[t] d1[t] d1[t] = β2 (m3[t] + p3[t] s3[t]) / p1[t] d3[t] = β1 (m2[t] + p2[t] s2[t]) / p3[t] d2[t] = β3 (m1[t]+ p 1 [t] s1[t]) / p 2[t] s1[t] = γ 1 p1[t] s2[t] = γ 2 p2[t] s3[t] = γ 3 p3[t]

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2. Notional Demand Driven Economies Solving di = si for i = 1, 2, 3, we obtain; So, the auctioneer can “solve” market equations for the prices for which all excess demands are zero.

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2. Notional Demand Driven Economy GDP Real GDP q3 q2 q1 P3 P2 P1 m3 m2 m1 GDPQuantities Traded Prices Money Holdings

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“Path” of Money Holding Vectors over time

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2. Notional Demand Driven Economies As time [t] elapses, the economy will find the general equilibrium * under well known conditions such as; the weak axiom of revealed preferences gross substitutions a dominant diagonal At the general equilibrium, all variables stop changing over time [t]. *Roberts and Schultz, Modern Mathematical and Economic Analysis, pp304.

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2. Notional Demand Driven Economies Finding The General Equilibrium set the changes in money holdings = 0 i.e. m1[t] - m1[t - 1] = p1[t] s1[t] - p2[t] d2[t] = 0 Since si[t] = di[t], we have p1[t] s1[t] = p2[t] s2[t] = p3[t] s3[t] Solving them gives; where M = m1 + m2 + m3

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2. Notional Demand Driven Economies So, for the set of constants where { β 1, β 2, β 3}={.5,.5,.6} { γ 1, γ 2, γ 3}={2,7,10} we have the set of equilibrium values {m1[0], m2[0], m3[0]} = {191.25, 191.25, 127.5}; {p1[0], p2[0], p3[0]} = {9.7788, 5.22699, 4.37321}; {q1[0], q2[0], q3[0]} = {19.5576, 36.5889, 43.7321}; we will use them as initial conditions. Then we will give economies some shocks for different models.

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Vector field of {m1’[t], m2’[t], m3’[t] } { β 1, β 2, β 3}= {.5,.5,.6} The long run equilibrium

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{ β 1, β 2, β 3}= {.5,.6,.6} The long run equilibrium Vector field of {m1’[t], m2’[t], m3’[t] }

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{ β 1, β 2, β 3}= {.5,.6,.6} The long run equilibrium Vector field of {m1’[t], m2’[t], m3’[t] }

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2. Notional Demand Driven Economies Q. Why do prices adjust even when demands are notional? A.There is the auctioneer in this economy. Agents trade with the auctioneer.

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3. Effective Demand Driven Economies Notional Demands Budget Constraints Effective Demands Budget Constraints and Other Constraints e.g. If a trader could not sell, then he cannot buy as much as he wanted.

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Triangular Trade

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3. Effective Demand Driven Economies Ideas For Implementation Have Trader 1 be an initiator of trades and Trader 2 and Trader 2 be utility maximizers Create variables for actual traded quantities ( ai= min[ di, si ] ) so that traders will adjusting budget constrains according to them

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3. Effective Demand Driven Economies

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Definitions B1; ai[t] actual traded q’s m1[t] = m1[t - 1] + p1[t-1] a1[t - 1] - p2[t-1] a2[t - 1] m2[t] = m2[t - 1] + p2[t-1] a2[t - 1] - p3[t-1] a3[t - 1] m3[t] = m3[t - 1] + p3[t-1] a3[t - 1] - p1[t-1] a1[t - 1] d1[t] = β2 (m3[t] + p3[t] a3[t]) / p1[t] d3[t] = β1 (m2[t] + p2[t] a2[t]) / p3[t] d2[t] = β3 (m1[t]+ p1[t] s1[t]) /p2[t] s1[t] = γ 1 p1[t] s2[t] = γ 2 p2[t] s3[t] = γ 3 p3[t] a1[t]=min[s1[t], d1[t] a2[t]=min[s2[t], d2[t]] a3[t]=min[s3[t], d3[t]]]

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3. Effective Demand Driven Economies Definitions B2; price adjustments z1[t] = d1[t] - s1[t] z2[t] = d2[t] - s2[t] z3[t] = d3[t] - s3[t] p1[t] = p1[t - 1] + k1*z1[t - 1] p2[t] = p2[t - 1] + k2*z2[t - 1] p3[t] = p3[t - 1] + k3*z3[t - 1]

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Effective Demand Driven Economy GDP Real GDP a3 a2 a1 P3 P2 P1 m3 m2 m1 GDPActual Quantities Traded Prices Money Holdings

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Notional Demand Driven Economy GDP Real GDP q3 q2 q1 P3 P2 P1 m3 m2 m1 GDPQuantities Traded Prices Money Holdings Recalling…

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a1 a2 a3 q1 q2 q1 Effective D.Nominal D. Quantity Traded Over Time

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Effective D.Nominal D. Prices Over Time P1 P3 P2 P1 P3 P2 Excess Demands Excess Demands = 0 for every commodity for every time = t

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3. Effective Demand Driven Economies Excess Demand Traded Amount

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3. Effective Demand Driven Economie Price Vector Money Holding

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Comparison of GDP[t] Paths over time Notional. D Effective. D 2: 0.5 0.6 Trader 2 prefers to buy more and hold less money

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Comparison of GDP[t] Paths over time Notional. D Half-Notional. DEffective. D 2: 0.5 0.6 Trader 2 prefers to buy more and hold less money

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Comparison of GDP[t] Paths over time Notional. D Effective. DHalf-Notional. D Effective. D. Supplies Fixed 2: 0.5 0.6 Trader 2 prefers to buy more and hold less money

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Comparison of GDP[t] Paths over time Notional. D Trader 1 expects his sales Trader 1 buys a fixed amount *P,S-fixed 2: 0.5 0.6 Trader 2 prefers to buy more and hold less money

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Notional. D Effective. D Comparison of GDP[t] Paths over time Initial conditions: For the first two periods, Trader 2 decided to buy less.

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4. Conclusions We have shown; The difference b/w Notional and Effective demands the Walrasian Auctioneer Triangular Trade Economic simulations Improve Our Understanding of the Neoclassical theory Have modified assumptions Light the theory from different angles Improve our intuitions on economic theories Economic Simulations using Mathematica iterations modified assumptions graphical interpretations

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Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 9 A Real Intertemporal Model with Investment.

Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 9 A Real Intertemporal Model with Investment.

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